Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized i DELIVERING AFFORDABLE, SUSTAINABLE, AND RELIABLE POWER TO PAPUA NEW GUINEANS – Key Challenges and Opportunities in the Power and Domestic Gas Sectors July 2018 i Table of Contents Boxes ................................................................................................................................... iii Figures .................................................................................................................................. iii Tables ................................................................................................................................... iii Acknowledgments ................................................................................................................ iv Executive Summary ............................................................................................................... vi Abbreviations and Acronyms .............................................................................................. xxv Chapter One: Introduction and Context .................................................................................. 1 Chapter Two: Lowering the Cost of Generation and Transmission: Least-cost Power Development Plan (LCPDP) ..................................................................................................... 4 2.1 Opportunity.............................................................................................................. 4 2.2 Approach Adopted for the Preparation of the LCPDP ............................................. 4 2.3 Levelized Cost of Electricity (LCOE) .......................................................................... 5 2.4 Demand Forecast ..................................................................................................... 8 2.5 Least-cost Generation Expansion Study ................................................................ 10 Chapter Three: Capitalizing on LNG Growth to meet Domestic Energy Needs ......................... 32 3.1 Gas-to-Power Opportunity .................................................................................... 32 3.2 Gas Resources and Supply Outlook ....................................................................... 32 3.3 Domestic Gas Market ............................................................................................. 35 3.4 Gas Pricing .............................................................................................................. 40 3.5 Recommended Way Forward ................................................................................ 43 Chapter Four: Improving PPL’s Financial and Operational Performance ................................. 48 4.1 Opportunity............................................................................................................ 48 4.2 Diagnostic of PPL’s Current Situation .................................................................... 49 4.3 Proposed Approach for Recovery: Preparation and Implementation of a Performance Improvement Plan (PIP) ........................................................................................ 56 4.4 Financial Implications of the LCPDP and PIP .......................................................... 62 4.5 Recommended Way Forward ................................................................................ 63 Chapter Five: Overall Conclusions ......................................................................................... 65 Appendix One: Major Assumptions for Least-cost Study in PNG ............................................ 67 Appendix Two: Location of Mining Sites ............................................................................... 82 Appendix Three: Information on Optimization of Transmission Systems ................................ 83 Highlights of the Study: POM System .................................................................................... 83 Highlights of the Study: Ramu System .................................................................................. 86 Appendix Four: Preliminary Assessment of Uses of Gas ......................................................... 93 Appendix Five: Assessment of Policy Tools to Encourage Domestic Use of Gas ....................... 99 Appendix Six: Detailed Recommendations per PIP Area ...................................................... 106 Appendix Seven: Key Financial and Operational Performance Data for PPL .......................... 108 Appendix Eight: High-priority Actions to Optimize Billing and Collection Rates .................... 111 Appendix Nine: Proposed Immediate Investments, Assessments and Studies to Improve Quality and Reliability of Electricity Supply ......................................................................... 116 Bibliography ...................................................................................................................... 117 ii Boxes Box 2-1: Implementation of the Outcomes of the LCPDP Through Competitive Procurement ... 31 Box 3-1: Business Case for a New Gas-fired Power Plant in the Highlands .................................. 44 Figures Figure 2-1: Comparison of LCOEs in POM System ........................................................................... 6 Figure 2-2: Comparison of LCOEs in Ramu System ......................................................................... 7 Figure 2-3: Comparison of LCOE for Gas Engines vs Hydropower Against Discount Rate .............. 8 Figure 2-4: Aggregated Peak Load Forecast in the POM System .................................................. 10 Figure 2-5: Aggregated Demand Forecast in the Ramu System .................................................... 10 Figure 2-6: Installed Capacity and Generation Mix for the BAU Scenario .................................... 11 Figure 2-7: Installed Capacity and Generation Mix for the Medium-growth Mining Scenario ..... 12 Figure 2-8: Installed Capacity and Generation Mix for the High-growth Mining Scenario ........... 14 Figure 2-9: Existing Situation and Possible Growth Scenarios ...................................................... 23 Figure 3-1: PNG Recoverable Gas Resources (by Maturity Level) ................................................. 34 Figure 3-2: PNG Gas Production Outlook ...................................................................................... 35 Figure 4-1: PPL’s Operating Margin ............................................................................................... 49 Figure 4-2: PPL’s Distribution of Operating Costs and Expenses .................................................. 50 Figure 4-3: Energy Injected vs. Sales Collected ............................................................................. 53 Figure 4-4: PPL’s Distribution of Customers vs Energy Sold .......................................................... 59 Figure 4-5: Service Quality vs Ability to Collect Revenues ............................................................ 60 Tables Table 2-1: Feasible Generation Options in the POM and Ramu Systems ....................................... 5 Table 2-2: Summary of Demand Forecast by Scenarios .................................................................. 9 Table 2-3: Least-cost Generation Expansion Plan in the POM System (BAU) (2018-30) .............. 17 Table 2-4: Least-cost Generation Expansion Plan in the Ramu System (BAU) (2018-30) ............. 18 Table 2-5: Least-cost Generation Expansion Plan in the POM System (Medium-growth Scenario) (2018-30) ....................................................................................................................................... 19 Table 2-6: Least-cost Generation Expansion Plan in the Ramu System (Medium-growth Scenario) (2018-30) ....................................................................................................................................... 20 Table 2-7: Least-cost Generation Expansion Plan in the POM System (High-growth Scenario) (2018-30) ....................................................................................................................................... 21 Table 2-8: Least-cost Generation Expansion Plan in the Ramu System (High-growth Scenario) (2018-30) ....................................................................................................................................... 22 Table 2-9: Transmission Interconnection Between the POM and Ramu Systems ........................ 28 Table 3-1: Preliminary Estimate of Domestic Gas Prices using the Cost-Plus Methodology ........ 42 Table 3-2: Summary of Policy Approaches to Support Domestic Use of Gas ............................... 45 Table 4-1: PPL Fuel Mix and Production Costs .............................................................................. 51 Table 4-2: Generation, Sales and Losses (2015-17)....................................................................... 52 Table 4-3: Main Building Blocks of the PIP .................................................................................... 57 Table 4-4: Scenarios Considered for Financial Impact Analysis .................................................... 62 Table 4-5: Outcome of Financial Analysis for Various Scenarios .................................................. 63 iii Acknowledgments This report was prepared by a core team led by Isabel Neto (Senior Energy Specialist, Task Team Leader)